Question

Comparative financial statements for Weaver Company follow:

Weaver Company Comparative Balance Sheet at December 31
	This Year			Last Year
Assets
Cash and cash equivalents	$	3		$	14
Accounts receivable		330			240
Inventory		110			170
Prepaid expenses		9			7
Total current assets		452			431
Property, plant, and equipment		550			440
Less accumulated depreciation		60			50
Net property, plant, and equipment		490			390
Long-term investments		25			34
Total assets	$	967		$	855
Liabilities and Stockholders' Equity
Accounts payable	$	260		$	220
Accrued liabilities		80			90
Income taxes payable		71			64
Total current liabilities		411			374
Bonds payable		215			140
Total liabilities		626			514
Common stock		235			300
Retained earnings		106			41
Total stockholders’ equity		341			341
Total liabilities and stockholders' equity	$	967		$	855

Weaver Company Income Statement For This Year Ended December 31
Sales					$	740
Cost of goods sold						420
Gross margin						320
Selling and administrative expenses						218
Net operating income						102
Nonoperating items:
Gain on sale of investments	$	13
Loss on sale of equipment		(5	)			8
Income before taxes						110
Income taxes						33
Net income					$	77

During this year, Weaver sold some equipment for $14 that had cost $35 and on which there was accumulated depreciation of $16. In addition, the company sold long-term investments for $22 that had cost $9 when purchased several years ago. Weaver paid a cash dividend this year and the company repurchased $65 of its own stock. This year Weaver did not retire any bonds.

Required:

1. Using the direct method, adjust the company’s income statement for this year to a cash basis.

2. Using the information obtained in (1) above, along with an analysis of the remaining balance sheet accounts, prepare a statement of cash flows for this year.

Answer 1

(value in $)
In the books of Weaver Company
Income Statement (Cash Basis)
For the year ended December 31, 20XX
Particulars	Amount
Cash received from Debtors/ Cash sales (Note 1)	650
Less: Cash paid to creditors/ Cash purchase (Note 2)	320
Gross Margin	330
Less: Selling and administration expenses (Note 3)	204
Net Operating income/(Expenses)	126
Income Tax Paid (Note 4)	26
Net Income after tax	100

Cash Flow Statement
Cash Flow from operating activities
Net Profit Before Taxation	110
Add: Depreciation (60-(50+16))	26
Adjustment for:
Loss on sale of Equipment	5
Less: Profit on sae of investment	13
Operating profit before working capital changes	128
Changes in working capital (exculding cash and bank):
Less: Increase in Accounts receivables (330-240)	90
Add: Decrease in inventory (170-110)	60
Less: Prepaid expenses increased (9-7)	2
Add: Increase in Accounts Payable (260-220)	40
Less: Decrease in accrued liabilities (90-80)	10
Cash generated from Operating Activities	126
Less: Income tax paid ( Note 4)	26
Net cash used in operating Activities		100
Cash Flow from investing Activities
Less: Payment for purchase of fixed assets (550-(440+35))	145
Proceeds from sale of fixed assets	14
Proceeds of sale of investments	22
Net cash used for investing activities		-109
Cash flow from financing activities
Proceeds from issue of Bond (215-140)	75
Less:Buyback of Common Stock	65
Less:Dividend Paid (77-(106-41))	12
Net cash used for financing activities		-2
Net decrease in cash		-11
Opening Cash		14
Closing Cash Balance		3

Notes:

Note: 1         Accounts Receivable Account
Particulars	Debit	Particulars	Credit
To Balance B/f	240	By Cash (Balancing Figure)	650
To Sales	740	By Balance c/d	330
	980		980
Note: 2         Accounts Payable Account
Particulars	Debit	Particulars	Credit
To Cash(balancing Figure)	320	By Balance B/f	220
To Balance c/d	260	By Purchase	360
	580		580
Purchase= Closing Stock+ Cost of goods sold- Opening Stock
ie . 110+420-170	360
Note: 3         Selling and administration expenses paid
Selling and administration expenses	218
Less:Depreciation (60-(50-16))	26
Prepaid (closing balance)	9
Less: Prepaid (opening balance)	7
Cash Paid on this year	194
Note: 4         Income Tax Payable
Particulars	Debit	Particulars	Credit
To Cash(balancing Figure)	26	By Balance B/f	64
To Balance c/d	71	By Profit & Loss account	33
	97		97